Clearfield, Inc.

Good afternoon. Welcome to Clearfield's fiscal first quarter 2019 earnings conference call. My name is Hector, and I will be your operator this afternoon. Joining us for today's presentation are the company's president and CEO, Sherry Beranek, and CFO, Dan Herzog. Following their commentary, we will open the call for questions. I would now like to remind everyone that this call will be recorded and made available for replay via a link in the investor relations section of the company's website. This call is also being webcasted and accompanied by a PowerPoint presentation called the Field Report, which is also available in the investor relations section of the company's website. Please note that during the course of this call, management will be making forward-looking statements regarding future events and the future financial performance of the company. These forward-looking statements are subject to risk and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. It's important to note also that the company undertakes no obligation to update such statements except as required by law. The company cautions you to consider risk factors that could cause actual results to differ materially from those in the forward-looking statements contained in today's press release, field report, and in this conference call. The risk factors section in Clearfield's most recent Form 10-K following with the Securities and Exchange Commission provides descriptions of those risks. As a reminder, the slides in this presentation are not controlled by the speaker, but rather by you, the listener. Please advance forward through the presentation as the speaker presents their remarks. With that, I would like to turn the call over to Clearfield's CEO, Sherry Beranek. Please proceed.

Good afternoon, and thank you everyone for joining us today. Following the record top-line performance in the prior quarter and fiscal year, We experienced another strong quarter in the first quarter of fiscal 2019. Revenue was up 19% year-over-year to $20.1 million, driven principally by sales of active cabinet solutions as well as continued demand for the rest of our product line. It's important to note that even with the lower gross margins associated with our active cabinets, we continued to demonstrate the accretive nature of this product line. During the quarter, we were able to drive significantly higher revenue that kept operating expenses relatively stable. Year-over-year, our newly enhanced and broadly integrated product suite contributed to an 82% increase in income from operations for the quarter. In addition, the year-over-year backlog was up 84% from $2.4 million to $4.4 million, with the backlog outside of active cabinet solutions up 62%. As we noted when we acquired the active cabinet product line in late second quarter of 2018, Our goal was to establish a market presence in active cabinet solutions, as well as increased revenue of all product lines through the strategic advantage of entering the sales cycle at an earlier point. We are pleased at the early demonstration of the execution of this strategy. The active cabinets are just one example of how we are continuing to enhance our competitive position and operational effectiveness as part of our coming of age plan, which I'll provide an update on later on the call. But before doing so, I want to go over our recent operational and market progress. As you'll see on slide 5, each of our four market areas within the broadband service provider marketplace, as well as our bill-to-print business, demonstrated solid performance this quarter. Community broadband was up $1.9 million, or 18%, year-over-year to $13 million. Similar to last quarter, driving this strong growth was an increase in sales of our traditional fiber management and connectivity products and ongoing success of the active cabinets. Clearfield's national carrier business was up $600,000 or 35% year-over-year to $2.3 million for the quarter. The introduction of the active cabinet product line through our reseller partnership with Calix is increasing sales into this market and bringing us earlier into the sales cycle. We saw a significant increase of field shield usage from one national wireline carrier as we continue to demonstrate the suitability of our craft-friendly solutions in these labor-intensive networks. Finally, the growth in the national carrier business also includes repeat business from another national wireline provider as we see renewed demand within that account, albeit at a more measured pace. The MSO or cable TV business was consistent with the last year at $1.9 million of revenue. Internationally, we experienced a $200,000 or 17% year-over-year increase in revenue in that business, which was driven by orders related to our active cabinet line, bossed up by weakness in the Canadian market, which was hardest hit due to a strong customer from fiscal 2018 being acquired. As for the increase of $500,000 in our bill to print business, which we have historically labeled our legacy business, that is primarily the result of one customer returning to their historical levels after experiencing a one-year lag in their business due to internal constraints. Overall, the $1.3 million generated in our bill to print business is consistent with the revenue from Q4 of last year. With that, I'll now turn the presentation over to our CFO, Dan Herzog, who will walk us through our financial performance for the first quarter of fiscal 2019.

Thank you, Sherry. Now looking at our financial results in more detail, our revenue in the first quarter of fiscal 2019 increased 19% to $20.1 million from $16.9 million in the same year goal period. The increase for the quarter was largely driven by the strong sales of our active cabinet line Bill to Print Products, and to a lesser extent, an increase in sales of our traditional product categories. Gross profit for the first quarter of fiscal 2019 increased 12% as compared to the first quarter of fiscal 2018 to $7.9 million, or 39.6% of total revenue. Gross profit margins for the first quarter of fiscal 2019 were down in comparison to the first quarter of fiscal 2018, but demonstrated a healthy increase in comparison to the fourth quarter of 2018 due to ongoing cost reduction initiatives. While the impact of the Chinese tariffs has been minimal year to date, we remain cautious about future implications. Our operating expenses for fiscal Q1 were $6.8 million, which were up from $6.5 million in the same year goal quarter. The increase was largely due to additions in headcount to support the continued growth of the organization and an increase of depreciation and amortization expense primarily related to the intangibles resulting from the purchase of the active cabinet line during the second quarter of fiscal 2018. These additional costs were offset by a decrease in legal expenses. Income from operations increased 82% to $1.2 million in the first quarter of fiscal 2019 from $644,000 in the same year-goal quarter. Income tax expense increased 246% from a benefit of $203,000 in the first quarter of fiscal 2018 to an expense of $296,000 in the first quarter of fiscal 2019. As you will recall, the first quarter of fiscal 2018 included a one-time benefit of $384,000 as a result of the Tax Cuts and Jobs Act enacted in December of 2017. The resulting net income of $1,010,000 or $0.08 per diluted share for the first quarter of fiscal 2019 was an increase of 7% from the first quarter of fiscal 2018 when we recorded net income of $943,000 or $0.07 per diluted share. Turning now to our balance sheet. During the first quarter, our cash, cash equivalents, and investments increased to $42.1 million from $35.5 million in the prior quarter ended September 30, 2018 due to strong collections in our accounts receivable. As you will recall, the company used $10 million in cash during 2018 for the acquisition of the Active Cabinet product line. As of December 31, 2018, we have repurchased an aggregate of 523,794 shares for approximately $6.6 million, leaving approximately $5.4 million available within our $12 million stock repurchase program. During the first quarter of 2019, we did not repurchase any shares as part of our share repurchase program. Going forward, we'll continue to allocate capital toward the areas where we believe have the greatest returns, including better serving our customers, investing in complementary products or technologies, enhancing our supply chain and operational infrastructure, and potentially acquiring accretive businesses or product lines that can help us further reduce our cost structure or significantly expand our market opportunity. Now with that, I would like to turn the call back over to Sherry. Sherry?